Tejon Ranch Co. (NYSE: TRC) — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Amounts below are in millions of dollars unless otherwise noted. Tejon Ranch is a diversified land development and agribusiness company with commercial/industrial real estate, resort/residential development, mineral resources, farming and ranch operations.
Financial results and liquidity
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $10.2 | $31.5 | $28.6 | $61.8 |
| Operating income (loss) | $0.04 | $11.0 | $(1.35) | $13.9 |
| Net income (loss) attributable to common stockholders | $(0.34) | $10.18 | $1.70 | $13.82 |
| EPS, diluted | $(0.01) | $0.38 | $0.06 | $0.52 |
| Operating cash flow | Not separately provided | Not separately provided | $14.75 | $1.87 |
- Q3 revenue declined about 68% and nine-month revenue about 54% year over year. The primary driver was the absence of commercial land sales recorded in 2022.
- Q3 net margin attributable to common stockholders was approximately negative 3.3%; nine-month net margin was approximately 5.9%. The filing does not present a gross-margin measure.
- At September 30, cash and cash equivalents were $43.1 million and available-for-sale securities were $29.5 million, totaling $72.6 million. Current assets were $89.0 million against current liabilities of $18.2 million.
- Total debt was $48.8 million; the revolving credit line had no balance and $40.6 million was available. The term note bears a 4.62% fixed effective rate through a swap and matures in 2032; a separate $1.5 million note bears 4.25%. Debt was about 9.2% of total capitalization, and the company reported covenant compliance.
- Nine-month investing cash use was $6.8 million and financing cash use was $3.9 million. Operating cash flow included substantial distributions from unconsolidated joint ventures.
Material changes and operating performance
- Commercial/industrial: Segment operating income fell to $1.3 million for Q3 from $15.5 million, and to $3.2 million for nine months from $20.8 million. No land sale revenue was recorded in 2023, versus $19.6 million in Q3 2022 and $24.3 million in the first nine months of 2022.
- Mineral resources: Nine-month segment operating income declined 41% to $4.6 million. Water sales fell to $6.6 million from $13.6 million as the 2023 State Water Project allocation was 100%, compared with 5% in 2022, limiting third-party sales opportunities. Royalties also declined.
- Farming: Nine-month segment loss narrowed to $0.8 million from $6.6 million, mainly on lower costs and water charges. Revenue nevertheless fell 34%; almond sales volumes and prices were lower, and delayed almond and pistachio harvests affected sales timing.
- Joint ventures: Nine-month equity earnings were $4.6 million, down 5%, largely reflecting lower Petro Travel Plaza earnings from weaker fuel margins. Management expected those margins to normalize in Q4 2023.
- Investment income increased as interest rates and invested securities increased. Nine-month tax expense was $3.6 million, with a 68% effective tax rate, versus 31% in 2022; the filing attributes the higher rate primarily to Section 162(m) compensation deduction limitations.
Outlook, risks and unusual items
- The filing provides no specific full-year earnings or revenue guidance. Management cautions that quarterly results are not indicative of full-year performance because farming, water transactions and real estate sales are seasonal or timing-dependent.
- Management expects continued investment in TRCC infrastructure, farm assets and master-planned communities. It estimated about $6.3 million of TRCC-East infrastructure investment and up to $2.5 million for planning, permitting, litigation and development activities at Mountain Village, Centennial and Grapevine for the remainder of 2023.
- Management said available cash, securities and credit capacity should cover near-term needs, but future development may require additional debt, joint-venture funding, asset sales or equity issuance. Tight capital markets, inflation in construction costs, water availability, crop prices and weather are key uncertainties.
- Centennial litigation: A March 2023 judgment rescinded project approvals. Tejon appealed and CBD/CNPS cross-appealed; the rescission order is on hold during the appeal. The potential monetary effect of an adverse outcome cannot currently be estimated.
- Commitments and contingent exposure: Contractual future water payments totaled $290.3 million, largely due after five years. Unconsolidated joint ventures had $199.0 million of debt; $46.0 million was subject to guarantees, which management did not expect to be called. A $4.4 million standby letter of credit supports East CFD bonds.
- Subsequent event: On October 23, 2023, the company terminated its interest-rate swap and received a $3.715 million cash termination payment. This occurred after quarter-end.
Important facts for investors to verify
- Whether land-sale activity resumes and how its timing affects earnings and cash flows compared with recurring leasing revenue.
- Progress and costs of the Centennial appeal, and the status of entitlements for the company’s other major development projects.
- Crop harvest timing, realized almond and pistachio prices, water availability and potential third-party water sales.
- Joint-venture performance, distributions, debt maturities and the company’s guarantee exposure.
- Use of available liquidity and any additional financing or equity issuance needed for planned development and water commitments.